Fannie, Freddie to repay taxpayers

More than five years after being taken over by the government and receiving billions in bailouts, housing giants Fannie Mae and Freddie Mac are about to pay back taxpayers.

On Friday, Fannie said it will send another $7.2 billion to the Treasury Department after reporting a $6.5 billion fourth quarter profit. Freddie is expected to release its earnings in the coming weeks and will likely also report a profit.

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After being taken over by the government in September 2008, Fannie and Freddie sucked in $187.4 billion in taxpayer funds to keep themselves afloat as the housing market cratered and the loans they guaranteed went south.

But their fortunes have improved greatly over the past five years, and the two mortgage giants have been raking in profits that now go straight into government coffers.

When Fannie mails its check to the government in March the two mortgage companies will have in total sent taxpayers at least about $192 billion, exceeding for the first time the amount they have received from the government. And that March figure will likely be larger when Freddie’s expected fourth quarter profits are included.

Paying back taxpayers is both a milestone in the recovery from the 2008 financial crisis and an illustration of the conundrum the government faces in deciding what to do now with Fannie and Freddie.

Returning more to the government than they received doesn’t mean the two companies are free of government control.

Under the terms of the law that allowed the government to take over Fannie and Freddie, or put them into a conservatorship, Treasury took a 79.9 percent stake in the companies that cannot be paid down — even though all future profits are swept back to taxpayers.

There is agreement in Congress and in the administration to get rid of Fannie and Freddie but no consensus on what new mortgage finance new system should go in their place.

Fannie and Freddie do not make loans, rather they guarantee mortgages they purchase from lenders. They package these loans into bonds and then sell the securities to investors.

It’s a system that ensures there is money available to finance home loans but also raises questions about what role the government should play in helping borrowers buy a house.

House Financial Services Chairman Jeb Hensarling (R-Texas) moved a bill through his committee last year that would get rid of Fannie and Freddie and greatly reduce the government’s place in the housing market. Hensarling and many House Republicans argue that private markets should determine how the mortgage finance system works not Washington policymakers.

There is little chance, however, that Hensarling’s bill will receive a floor vote this year with GOP leadership reluctant to have moderate Republicans take a vote on a politically tricky piece of legislation.

Meanwhile the leaders of the Senate Banking Committee are working on their own bipartisan plan and while they say progress is being made, they have yet to release a proposal and there is skepticism among analysts and industry officials that they can achieve a consensus on the committee.

“I do think that most of the parties involved understand that they want to move with some speed because they don’t want to lose the window,” National Economic Council Director Gene Sperling said at POLITICO’s Morning Money Breakfast event on Thursday. The administration has been working with Banking Committee Chairman Tim Johnson (D-S.D.) and the panel’s top Republican, Mike Crapo of Idaho on their bill.

Waiting on the sidelines are hedge funds and other investors who want the government to relinquish its control of the mortgage giants and make Fannie and Freddie private companies once again. They argue that the current bailout arrangement that was altered last year to direct all future profits to Treasury unfairly cuts them out of their investments.

Some, like investment firms Fairholme Capital Management and Perry Capital, have recently sued the government seeking a share in the profits and have alleged that officials misled investors about the health of the two companies before taking them over.

Breaking down the bailout, Fannie will have paid back $121.1 billion in March after receiving $116.1 billion in bailouts. Freddie has paid $71.3 billion to Treasury as of December — roughly $90 million more than it has received.

Under some tallies, the government bailout of Fannie and Freddie comes in at $189.4 billion because of a $2 billion in preferred stock granted to the government during the takeover. Regardless, Fannie’s March payment will put the total amount paid back above that number as well.

Mayopoulos said that going forward payments to Treasury may begin to shrink because he expects annual profits to be lower as the booming refinance business wanes. But as money continues to move to government coffers, he added that Congress still needs to address what to do with the two companies.

“We’re not looking to send a message that Congress should speed up or slow down, but we would note that it remains critically important that policymakers address the future of housing finance,” Mayopoulos said on a call with reporters.

Both Fannie and Freddie still have authority to take future draws if the recovering housing market reverses, and losses on the nearly $5 trillion in mortgage debt both companies currently back begin to pile up again.

But for now they are pumping revenue into the government with little clarity about their future.

“I’m very proud of what our employees have achieved, and I’m very, very happy for taxpayers,” Mayopoulos said.